2003 EIA Tax Policy Priorities
Accelerated depreciation and expansion of first-year bonus depreciation
- The real lag in the economy in the past couple of years has come not from a lack of consumer spending but from a severe drop in business spending and investment in expansion. A shift forward in the depreciation schedules of all asset categories except real estate would provide a real, near-term stimulus to the entire economy. For example, allowing companies to write off assets such as computers, software and semiconductor-manufacturing equipment over three years instead of five would reduce the after-tax cost of capital equipment, making the economic investment more attractive and encouraging immediate business spending.
- A one-year provision allowing certain business equipment to be expensed entirely in the year of purchase would provide further incentive for companies to make capital investments they have postponed in recent years. A combination of accelerated depreciation and first-year expensing should benefit companies and industries of all sizes.
- An acceleration in the depreciation schedule will bring the write-off period for many assets more in line with economic reality, reflecting the actual life expectancy of high-tech and other equipment.
HR223 (Wilson): Would increase the current 30% bonus depreciation to 50% through 2007
HR683 (English-Jefferson): Would increase the current 30% bonus depreciation to 100% through 2005
HR771 (Weller-Upton): Would increase the current 30% bonus depreciation to 100% for 18 months
HR1232 (Dreier): Would shorten depreciation period of software and high-tech equipment
HR1234 (English-Neal): Would make the 30% bonus depreciation permanent
S879 (Smith): Would increase the current 30% bonus depreciation to 50% through 2009
S895 (Nickles-Lincoln): Would include wireless equipment in qualifying high-tech equipment
Permanent and enhanced R&D tax credit
- A permanent research tax credit that is available to more research-intensive businesses will stimulate additional R&D spending in the US. Since its enactment in 1981, the R&D tax credit has demonstrated that it is a powerful and effective incentive for firms to increase research spending. Congress has endorsed the credit by extending it eight times since its enactment.
- By enacting the Alternative Incremental Research Credit (AIRC), Congress also extended the incentive effect of the credit in 1996 to companies that, due to changing economic circumstances relative to the base period, were unable to claim the credit despite significant R&D spending.
- To provide stability and broaden the reach of this proven incentive, Congress should make the credit permanent, increase the AIRC rates, and provide an alternative simplified credit calculation to induce even more research-intensive businesses to undertake additional research spending.
- A 2000 study based on OECD data that measures the impact of government fiscal support for R&D shows that Spain, Portugal, the Netherlands, Canada, Australian and Japan each provide more generous and permanent fiscal incentives for R&D investment than those provided by the US. The UK has since extended its current R&D incentive to all companies. Over the long term, lack of a permanent US R&D credit could cause some multinational firms to locate future projects offshore, where R&D policies are more stable, resulting in a permanent loss of US technology advancements, jobs and industrial innovation.
- The recent economic slowdown has further increased the pressure on US companies to cut costs while attempting to maintain a strong competitive position. In order to ensure that R&D activity continues to produce jobs and growth in the US, federal government policies must be a dependable inducement to locate and increase research activity in the US.
HR428 (Sensenbrenner): Would make the R&D tax credit permanent
HR463 (N. Johnson): Would make the R&D tax credit permanent, increase AIRC rates and provide an alternative simplified credit
S664 (Hatch-Baucus): Companion to HR463
Tax relief for overseas profit repatriation (dividends received deductions)
- A temporary implementation of the dividends received deduction could trigger as much as $135 billion in diverse new investment in the U.S. economy in the coming year.
- The proposal would provide an 85% deduction on all distributions of earnings from active foreign business operations in excess of a base amount during a one-year period. These earnings are currently taxed at 35%. This immediate and significant infusion of cash will be used by U.S. companies to invest in the U.S. economy in many ways, including expenditures for employees, capital assets, venture capital, research and development and other business investment. Other uses – such as shareholder dividends, stock repurchases and debt reduction – will strengthen and increase confidence in the nation's capital markets, increase disposable income and company earnings, foster additional investment in equities and encourage companies to reduce their reliance upon debt to fund their operations.
HR767 (English): Would reduce by 85% taxes on three years of foreign earnings brought back to the U.S.
S596 (Ensign): Companion to HR767
Elimination of FICA taxes on severance payments
- Companies that have been most severely impacted by the economic downturn and the displaced workers they have been forced to lay off because of necessary reductions have been even harder hit because they have been forced to pay unfair taxes on severance payments. In many cases, FICA (Social Security and Medicare) taxes are withheld from these payments even though under a recent Court of Federal Claims ruling they do not constitute "wages" for FICA tax purposes as defined by the U.S. tax code.
- This proposal would remove cumbersome, administrative hurdles and simply exempt all types of severance pay from FICA and FUTA taxes. The result would be fair treatment for displaced employees, regardless of the state in which they work. Making these changes temporary from Jan. 1, 2000, to Dec. 31, 2003, will help those who need it most.
- Displaced workers would be helped considerably by the return of these unfairly paid FICA taxes. These funds will help sustain them and their families as they look for jobs, and it will provide resources to help them retrain for new careers. Moreover, higher-paid employees will not receive a greater benefit than lower- and middle-income workers because the majority of FICA taxes are capped.
Broadband tax incentive
- A tax incentive to encourage broadband providers to extend and upgrade their networks could make a positive contribution to the economy, improve workplace efficiency, and bring new services to communities.
- There are two feasible options for this incentive. The first would provide a 10% tax credit for current-generation broadband investment in rural and underserved areas and a 20% credit for next-generation investment. The second would work the same way but through expensing rather than a tax credit.
HR768 (English-Matsui): Would provide tax credits for broadband investment in rural and underserved areas
HR769 (English-Matsui): Would allow expensing for broadband investment in rural and underserved areas
S160 (Burns-Baucus): Companion to HR769
S905 (Rockefeller): Companion to HR768
